Exam 15: Target Costing and Cost Analysis for Pricing Decisions

Use the following information to answer the following Questions Ralph’s Auto Repair uses time and material pricing. The body shop, which anticipates 10,000 direct labor hours of activity, has the following data: -The time charge per hour is:

For many years, Oxmoor Corporation has used a straightforward cost-plus pricing system, marking its goods up approximately 20% of total cost. The company has been profitable; however, it has recently lost considerable business to foreign competitors that have become very aggressive in the marketplace. These firms appear to be using target costing. An example of Oxmoor's woes is typified by item no. 710, which has the following unit-cost characteristics: direct materials, $50; direct labor, $90; manufacturing overhead, $40; and selling and administrative expenses, $20. The going market price for an identical product of identical quality is $210, which is below what Oxmoor is charging. Required: A. Contrast cost-plus pricing and target costing. B. What is Oxmoor's current selling price for item no. 710? C. If Oxmoor used target costing for item no. 710, what must happen to costs if the company desired to meet market prices and maintain its current rate of profit on sales? By how much?

If a company uses a cost-plus approach to pricing, it will find:

Buffington, Inc. produces a number of components that are used in home theater systems. Mike Boston, head of the company's market research department, has identified the need for a new component that will most likely sell for $75. Projected volume levels are anticipated to reach 28,000 units in the first year, as several firmly entrenched competitors will be introducing a similar product in the not-too-distant future. Conversations with Buffington's engineers and reviews of cost accounting data related to similar products that the company manufactures resulted in the following cost estimates for the new component: Buffington currently uses cost-plus pricing and adds a 20% markup on total production cost to arrive at what is normally a competitive selling price. Required: A. What is the anticipated selling price of the new component if Buffington uses its current pricing policy? What difficulties, if any, might the company face in the marketplace? B. Assume that Buffington decides to switch to target costing. What price would the company charge for the new component? C. With the switch to target costing, what would Buffington have to do to the component's manufacturing cost to achieve the normal profit margin on sales? Be specific and show calculations.

Due to cost-based pricing, an organization or industry can price its products below their production costs indefinitely.

Fantasy Transport Company has average invested capital of $800,000 and a target return on investment of 15%. The total cost per unit is $20 based on a volume level of 25,000 units. Fantasy's markup percentage on total cost is:

The difference between absorption manufacturing cost and total cost with respect to product pricing is caused by:

Use the following information to answer the following Questions The Pines Company, which manufactures office equipment, is ready to introduce a new line of portable copiers. The following copier data are available: -What price will the company charge if the firm uses cost-plus pricing based on total cost and a markup percentage of 40%?

The law prohibits price discrimination of quoting different prices to different customers for the same product or service, but it permits predatory pricing to establish initial markets.

The curve that shows the change in total cost that accompanies a change in quantity produced and sold is called the:

Aerial Roofing performs roofing services for commercial clients. The company recently submitted a bid of $371,000 to the Ponca School System, computed as follows: Aerial adds a 20% profit margin to all jobs, computed on the basis of total direct cost. In Ponca's case the profit margin amounted to $50,000 ($250,000 * 20%), producing a bid price of $371,000. Assume that 60% of construction overhead is fixed. Required: A. If Aerial had excess capacity, what would be the lowest cost total that the company should use when figuring its bid for the district? How can High justify this amount? B. If Aerial had no excess capacity, what would be the lowest price that the company should charge? C. What is the primary benefit and problem of approaching a competitive bid situation with a low-bid philosophy?

The controller for Rich Photographic Supply has established the following cost pools and cost drivers: An order for 1,200 boxes of film-development chemicals has the following production requirements: Rich established a target price by adding a 40% markup to total manufacturing cost. Required: A. Determine the order's target price by using the activity-cost pools. B. Assume that Rich used a single, combined overhead rate based on weight of raw materials. 1. Determine the predetermined overhead rate. 2. Determine the expected cost of the order. 3. Determine the target price. C. Which approach above ("A" or "B") seems to be a more reasonable method to establish target prices? Explain.

Which of the following is (are) a key feature of target costing?

Consider the following statements about pricing: I. Prices are often determined by the market, subject to the constraint that costs must be covered in the long run. II. Prices are often based on costs, subject to the constraint that customers and competitors will exert an influence. III. A balance of market forces and cost is important when making pricing decisions. Which of the above statements is (are) true?

In a typical business, the firm's overall demand would be influenced by interactions of pricing policies and:

Durango Industries employs cost-plus pricing formulas to derive selling prices for its various products. If the formulas are all used correctly, which of the following cost bases will result in the highest selling price?

Matton Corporation manufactures a single product that has a cost of $350. The company uses a 70% markup on cost to arrive at a selling price of $595, which results in a price that virtually always exceeds that of the market leaders. If Matton changes to the approach known as target costing, the company will first undertake a thorough study of competitors' prices.

Charter Corporation manufactures a single product that has a cost of $350. The company uses a 70% markup on cost to arrive at a selling price of $595, which results in a price that virtually always exceeds that of the market leaders. If Charter changes to the approach known as target costing, the company will first:

If a firm has no excess capacity, which of the following is a sensible bidding strategy?

Gypsum Park Recreation is exploring a competitive bidding situation. The firm, which currently has no excess capacity, estimates the following costs for a project to be performed for the Talent School District: Which of the following cost figures would be used in determining a minimum price if Gypsum Park decides to bid on the Talent project?